Trading the Sears end game

If Sears Holding were to go bankrupt, planned or induced, it would be a disaster for ESL Investments. . At one time, more than half the assets of ESL Investments were in the stock of Sears Holding. It is a huge blow for any hedge fund to have its biggest position, or a major one, go under. Such an event is one from which it is very difficult, almost impossible, for a hedge fund to recover.

The table below certainly beckons to the short community. While earnings-per-share (EPS) growth has been falling for Sears, it is projected to plunge almost another 40% next year. The mean analyst expectation for the stock price is a drop of more than 50%, from more than $40 a share now to less than $20. With a short float of 11.27% (5% is considered troubling), many are positioning that Sears Holding will fall.

Metric

Sears Holding

Present Price

$46.66

Profit Margin

(7.05%)

Return on Equity

(49.27%)

Return on Investments

(22.39%)

Return on Assets

(11.91%)

Estimated EPS Growth Next Year

(37.70%)

Analyst Mean Target Price

$17.33

Source: FINVIZ

But it is estimated that the acquisition cost for ESL Investments of the shares for Sears Holding was only about $16. If so, it still has been a profitable investment (although the Standard & Poor’s 500 Index has performed better). Early in 2012, Sears Holding soared on speculation that Lampert would take it private. To protect his investment, that will become even more likely if the stock price of Sears Holding continues to fall.